The IRS considers $600 or more of forgiven debt as taxable income, but in some circumstances you may have to pay income tax on canceled debt that falls below $600. There are some exceptions--for example, if you're insolvent at the time your debt is settled then you don't have to report the forgiven debt as taxable income--but those exceptions have their own exceptions. Don't make any final assumptions on your tax consequences until you speak with your attorney and look at an updated 1099-C form.
Nina L. Kaufman is an award-winning business attorney, author and speaker. For more than 15 years, she has successfully navigated thousands of small businesses through the legal hurdles they face in starting and running their companies. Under her
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